Question: Cummings Products is considering two mutually exclusive investments whose expected net cash flows are as follows:
| Expected Net Cash Flows |
|
| Year |
Project A |
Project B |
| 0 |
-$290 |
-$400 |
| 1 |
-387 |
134 |
| 2 |
-193 |
134 |
| 3 |
-100 |
134 |
| 4 |
600 |
134 |
| 5 |
600 |
134 |
| 6 |
850 |
134 |
| 7 |
-180 |
134 |
1. a) What is each project's IRR? Round your answers to two decimal places.
2. a) Calculate the two projects' NPVs, if you were told that each project's cost of capital was 14%. Round your answers to the nearest cent.
b) Which project, if either, should be selected?
c) Calculate the two projects' NPVs, if the cost of capital was 17%. Round your answers to the nearest cent.
d) What would be the proper choice? Project A or Project B?
3. a) What is each project's MIRR at a cost of capital of 14%? (Hint: Note that B is a 7-year project.) Round your answers to two decimal places.
b) What is each project's MIRR at a cost of capital of 17%? (Hint: Note that B is a 7-year project.) Round your answer to two decimal places.
4. a) What is the crossover rate? Round your answer to two decimal places
b) What is its significance?
I. The crossover rate has no significance in capital budgeting analysis.
II. If the cost of capital is greater than the crossover rate, both the NPV and IRR methods will lead to the same project selection.
III. If the cost of capital is less than the crossover rate, both the NPV and IRR methods lead to the same project selections.